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Equilibrium income (Y) is the endogenous variable to be determined. The autonomous components of expenditure, I and G, as also T are exogenous variables determined by factors outside the model. ADVERTISEMENTS: Consumption is partly autonomous and largely induced expenditure, determined endogenously by the consumption function:
Explain macro equilibrium using the income-expenditure model. Identify macro equilibrium graphically and using tables. In the AD-AS model, we identified the macro equilibrium at the level of GDP where AD=AS. We now have the tools to identify macro equilibrium in the income-expenditure model.
Equilibrium is a point of balance where no incentive exists to shift away from that outcome. To understand why the point of intersection between the aggregate expenditure function and the 45-degree line is a macroeconomic equilibrium, let's take a look at the diagram below.
This exercise is designed to show you how to find a new equilibrium in the income-expenditure model following a change in aggregate expenditure.
Topics include how to use a market model to predict how price and quantity change in a market when demand changes, supply changes, or both supply and demand change. In a competitive market, demand for and supply of a good or service determine the equilibrium price.
GDP is equal to the actual expenditure on domestically produced goods and services. Therefore, actual expenditure on domestically produced goods and services is equal to income (Y) by assumption. Note that actual investment expenditure includes involuntary changes in inventory.
How does the aggregate supply and aggregate demand model explain equilibrium of national output and the general price level? How do economic fluctuations affect the economy's output and price level? Fiscal policy holds some of the keys.
